Last month, Hahnemann University Hospital, an academic safety-net institution housed in Center City, Philadelphia, quietly shut its doors. Repurchased twice by private equity investors, first in 1998 and again in 2018, Hahnemann struggled to turn a profit for years in a city where its nonprofit rivals continued to grow.
Private equity’s growing influence in health care has made waves in both the media and academia in recent months, from its shadow lobbying against legislation that would end the practice of surprise billing to the way it has deprioritized patient care in favor of profit margins at acquired dialysis centers. In Hahnemann’s case, the rumor was that ownership hoped to convert the distressed hospital into lucrative high-rise condominiums.
When the news of the shutdown broke in June, 550 residents, facing careers in peril, began anxiously seeking out other hospitals that would give them homes to complete their education. Resident physicians make up the lifeblood of the U.S. health care system—we are the ones who ensure that no patient falls through the cracks. Yet, rather than help place these physicians-in-training at appropriate nearby health systems, Hahnemann turned a blind eye to its status as an academic medical center. Instead, it decided to auction all 550 residency positions to the highest bidder. The business model of private equity, long known for flipping businesses and their assets for a profit, has now turned to residency slots as a new way to increase returns.
Here is why this is so frustrating for prospective doctors: To practice medicine, trainees are required to complete a three- to seven-year residency at an accredited hospital program. (This is following four years of medical school.) Unlike the traditional labor market, medical students don’t choose where they work; they are assigned and locked into multiyear employment contracts with a single hospital via the Match, a standardized application process based on the 1962 Gale-Shapley algorithm, which is controlled by nonprofit teaching hospitals. Each year in mid-March, anticipation and anxiety permeate the air of medical school atriums as fourth-year medical students receive envelopes matching them to residency programs.
Student preferences for where they would like to work are taken into account, but ultimately, trainees are left with little bargaining power once they have been assigned positions. This allows teaching hospitals and the Accreditation Council for Graduate Medical Education to set both compensation and work conditions for residents as they deem fit. This dynamic, where everything is optimized in one sweeping scramble, also makes finding a new residency position after a hospital closes excruciatingly difficult.
The Centers for Medicare & Medicaid Services, or CMS, funds a fixed number of graduate medical education positions with $15 billion in taxpayer funds, paying $100,000 to a hospital per hired trainee. But a typical salary range for residents is around $50,000 to $65,000 (though each hospital will pay an additional $15,000 per resident in educational and malpractice spending). This means that not only are hospitals generating at least a 20 percent profit margin on this government funding, but the amount also excludes the market value of the medical services provided by those residents—which the hospitals still bill for—and the additional $168,000 to $218,000 in total operating cost savings for hospitals per employed resident. It’s no surprise, then, that hospitals are fervently bidding for Hahnemann’s coveted residency slots. A consortium of Northeast hospitals bid $55 million for the 550 positions. A bid of $60 million came in from a California health care firm shortly after.
CMS considers this sale illegal and argued that the auction could set a dangerous precedent, particularly for struggling hospitals, to use resident physician positions as valuable assets to be sold. In a statement, House Energy and Commerce Chairman Frank Pallone Jr. and Ways and Means Chairman Richard Neal said, “The approval of this $55 million sale sets a dangerous precedent and sends a signal to Wall Street that there is money to be made off the downfall of community hospitals.”
Residency positions should not be bought and sold like financial assets on Wall Street. They are simply the right for a specific hospital to receive Medicare funding.
Once the dust clears, 2,500 Hahnemann hospital staff will have lost their jobs, both depressing the Philadelphia economy and stressing neighboring health systems.
Although Hahnemann trainees are scrambling to find new positions in what has become the largest layoff of resident physicians in history, it is the patients of Philadelphia, who sought care at the safety-net hospital, who will fare the worst as they lose their doctors. Long-term patient-physician relationships will dissolve, sick patients receiving regular chemotherapy or dialysis will have their care plans thrown into jeopardy, and some residents of Philadelphia might be left without a place to go at all. If this sale is allowed to pass, those receiving care at safety-net hospitals around the country may also soon feel the plight of the patients in southeast Pennsylvania. A former classmate, now a surgical resident at a different Philadelphia hospital, reported a surge in trauma patient volume following Hahnemann’s closure—but without the staff on hand to manage it.